Out of The Box Approach Analyst from UBS Downgrade Yes Bank

July 8, 2015

We’d like to commend the remarkable job done by Out of the Box thinking Analysts covering the Finance / Banking vertical at UBS Securities. What they did is instead of completely relying on data provided by companies to them, they went a step ahead and collected 7,000 collateral documents (used to secure loans) filed at Ministry of Corporate Affairs [MCA] which are pertaining to 100 potentially stressed companies covering approximately US$100bn in loans to understand the exposure and lending practices of banks. Then they tested the financial stability of Banks against their model and this is what came out. [This reminds me of the Movie Margin Call, where the Kid completes the model half finished by his superior who was let go during the financial crisis]

Axis Bank (Axis) also had a high share of loans backed by immovable property (around 35%), while YES had the highest share of term loans backed by unlisted shares and current/movable assets (33%). YES, ICICI and Axis granted 10-20% of loan approvals on subservient charges.

UBS Analysts’ study indicates that Yes Bank’s loans approved to stressed companies [JayPee, Essar and GMR Infra] have increased significantly (up 3x) in FY12-15 and these loans could be at risk given a gradual economic recovery and continued stress in sectors such as steel, power and construction. Loan approvals to the sample set of companies are estimated at 125% of net worth and 19% of outstanding loans. What else worries the analysts most is loan approvals to stressed companies (a >20% share in our sample) backed by collateral such as current assets and unlisted shares.

They have downgraded Yes Bank to SELL when the price was Rs 860. UBS expects yes Bank EPS for FY16 to be Rs 54 and for FY17 to be Rs 68 with a price target of Rs 740 on the stock of Yes Bank.